Mike Madigan's Folly? Don't Be So Sure

The Speaker’s so-called ‘millionaires’ tax’ could have legs despite intense opposition from powerful opponents, including the governor, says a BGA Rescuing Illinois report.

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Democratic House Speaker Michael J. Madigan

Illinois’ controversial "millionaires’ tax," one of Democratic House Speaker Michael J. Madigan’s top revenue-generating ideas and legislative causes, is alive and kicking even as it stirs continuing resistance from opposing lawmakers, Gov. Bruce Rauner and business interests, a BGA Rescuing Illinois report finds.

In an attempt to blunt Gov. Rauner’s budget ax, Madigan is pushing for Illinois to join a growing list of other states that have recently sanctioned variations of the "millionaires’ tax." Basically, Madigan’s plan calls for charging a 3 percent surcharge on annual income over $1 million.

California, New Jersey, Oregon, Hawaii, Maryland, Vermont and New York have each created income tax brackets that compel the wealthy to pay a greater percentage of their riches to the state.

In 2014, Illinois had an estimated 265,000 millionaires, reports Phoenix Global Wealth Monitor, a market research firm. If Illinois passes the millionaires’ tax it could mean up to at least $1 billion annually in added revenue, according to Madigan’s estimate.

Gov. Rauner, who made millions as a private equity investor before being elected, has shot down the idea of generating more revenue by raising taxes and spoke out against the Madigan tax while campaigning for governor in 2014. Instead, Rauner’s 2016 Illinois budget philosophy centers on reducing costs by pulling back on state services while also trimming the overall size of the government.

Illinois is in the clutches of a mammoth budget crisis with an estimated $6 billion deficit and over $110 billion in unfunded pension liabilities.

"The governor has said that he feels that he can eliminate the deficits just by cutting state services. I disagree," said Madigan, (D-Chicago), during a press conference after the governor’s annual budget address in February.

TAX HISTORY

Last year, Madigan proposed—but failed to gain support — for the same millionaires’ tax.

Yet there appears to be populist support for Madigan’s plan.

While voters in November sent fiscally conservative Republican Rauner to the governor’s office with about 51 percent of the vote, even more — roughly 63 percent — said they like the idea of taxing the rich when asked about that possibility in a statewide advisory referendum.

Moreover, an estimated 75 percent of 1,000 registered voters statewide said they’d back a 3 percent millionaires’ tax, according to a recent poll conducted by the Paul Simon Public Policy Institute at Southern Illinois University.

Now, Madigan has resurrected his pet proposal, which also comes after the state’s income tax rate in January dropped to 3.75 percent, following a temporary increase to 5 percent in 2011.

Some Republicans contend Madigan is posturing and isn’t serious about pursuing the tax this session. But Steve Brown, Madigan’s spokesman, said passing the millionaires’ tax is a top priority this legislative session, which ends in late May. However, the Democratic House Speaker does not have a set timetable, he added.

"We’re letting the result of the [advisory] referendum sink in. People are a little shell shocked about the budget," said Brown.

Madigan has introduced the tax as a House Joint Resolution Constitutional Amendment. Such resolutions require adoption by both the Senate and the House, at which point it's then put on the ballot for voters to accept or reject in a binding resolution that allows the tax rate change under the state constitution. House rules also require such resolutions be approved by 71 votes, a threshold that will likely require "aye" votes from several Republicans.

Madigan has acknowledged the challenge of gaining support in the House, despite presiding over a Democratic super-majority and having what appears to be adequate support for the measure in the Senate, where Democrats also have a majority.

"The answer . . . lies among Republicans from central and southern Illinois who represent areas that would profit greatly from the imposition of the surcharge," Madigan said at the recent press conference.

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Rep. Jack Franks
(D-Marengo)

Rep. Jack Franks, (D-Marengo), who’s among those denying Madigan support needed to pass the measure with Democrats alone, said that time was ultimately on Madigan’s side.

"There’s no rush," said Franks, who contends the proposed tax is "bad public policy" that will chase wealthy people from Illinois and hurt its economy.

Brown wouldn’t say if any House Republicans were on board with the proposal yet, but suggested they should fall in line with "the vote of their constituents."

"It was never intended to be an all Democratic proposal to begin with," he added.

OTHER STATES TAX BIG INCOMES

Reviled by fiscal conservatives who contend a millionaire’s tax will damage corporate job-generation and incite the rich to flee for low-tax states, the measure has nonetheless proven to be a way to raise revenue in a handful of states, the BGA Rescuing Illinois examination found.

Some examples:

  • California: Golden State millionaires pay an income tax rate of 13.3 percent. California has a progressive tax scale with nine brackets. The very lowest rate for those earning up to $7,749 is 1.0 percent while the second-highest tax rate (beneath millionaires bracket) is 12.3 percent.
  • Oregon: When faced with massive budget cuts, voters in Oregon, which does not have a state sales tax, approved a temporary 11 percent tax rate on incomes above $250,000. That rate ended in 2011, but Oregon still taxes incomes above $125,000 at a rate of 9.9 percent. Those beneath $125,000 pay at a 9.0 percent rate.
  • New Jersey: Anyone making over $500,000 a year has paid a nine percent income tax since 2004. In 2009, the state also imposed a temporary one-year tax on top of that, boosting the top tax rate to 10.75 percent on incomes above $1 million. New Jersey also uses a sliding scale of six brackets for taxing at various income levels.

A 2011 study co-authored by two sociologists from Stanford and Princeton University, published in the National Tax Journal, found a small and statistically insignificant number of millionaires left New Jersey after taxes on the rich increased.

"I’m sure we lose a few here and there and some may have left because of taxes," said Jon Whiten, deputy director for the New Jersey Policy Perspective, a nonpartisan research group. "But even if wealthy individuals are leaving, the state . . . continues to generate new ones. So it really hasn’t affected the state."

In Maryland, state political leaders allowed a temporary 6.25 percent tax rate on millionaires to expire in 2011 after a drop in the number of millionaires filing state tax returns. Maryland still taxes those making more than $250,000 at a rate of 5.75 percent compared to the 4.75 percent rate charged to those making less.

Any decision to leave a state involves more than just taxes, even when it comes to millionaires, says Jason S. Seligman, an economist and tax expert with the John Glenn School of Public Affairs at the Ohio State University.

Urban centers with the cultural and economic appeal of Chicago, which Seligman referred to as "a rare and precious city", tend to hold on to the well-heeled, even if they resent paying more.

"I am not being smug or smarmy. The question is begged: where would they go?" said Seligman when asked about the potential of a millionaires’ tax in Illinois. "They would have to look for states under 6.75 percent and they would pay big costs moving there."

WHAT IF TAX PASSES?

Madigan says revenue raised by the tax would go toward funding K-12 education, boosting by $550 the state’s per-pupil allocation — currently pegged at $5,782 under Rauner’s budget proposal. Money would be distributed directly to local school districts beginning in January 2017.

No sooner had Madigan announced a renewed push for this tax, a powerful coalition of union leaders and schools advocates announced their support.

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Robin Steans, Executive Director of Advance Illinois

"Money alone will not improve education or close achievement gaps, however, money matters," Steans said."This proposal is an important first step toward restoring the millions that have been cut from K-12 education in recent years," said Robin Steans, executive director of Advance Illinois, a business-backed education reform group, who said the measure is "not a complete solution" but amounts to progress toward solving "education funding concerns."

POLITICAL OPPOSITION

Critics argue that the imposition of a millionaires’ tax could lead to a drop in overall revenue because the wealthy will take their money to lower-tax states such as Florida, Indiana or Texas.

The Illinois Policy Institute (IPI), a Chicago-based nonprofit research group that advocates for free market-based legislation, castigates the tax as an unwanted drag on the state economy, especially small business owners, who tend to create entry-level and local community-based jobs.

"A millionaire’s tax won't solve Illinois' budget problems and neither will any other tax hike proposals. Illinois has record revenues, and yet lawmakers cannot balance the budget. Why is that? Spending is out of control and much-needed reforms are long overdue," said Kristina Rasmussen, executive vice president of IPI.

"Many of the so-called 'millionaires' who would pay higher taxes actually are small business owners who are creating jobs in Illinois – jobs this state desperately needs," she added.

Some Republicans doubt Madigan is serious about pursuing the tax plan. Instead, they speculate he may have proposed the tax with an eye toward using it as a bargaining chip when budget negotiations with Rauner heat up later this session.

A spokesman for Rauner did not respond to requests for comment.

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Jim Durkin
Republican House Minority Leader

Jim Durkin, Republican House Minority Leader, blasted the Speaker’s proposal.

In a statement, Durkin, (R- Western Springs), suggested it would "drive high wage earners out of the state" and have "an adverse impact upon small business owners."

"When we have high unemployment, billions of dollars in unpaid bills, and unbalanced budgets, is this the way to put Illinois back on track?" Durkin asked.

 

Michael Madigan image courtesy of Chicago Sun-Times.
Robin Steans image courtesy of Advance Illinois website.

 

BGA policy analyst/researcher Alex Gilewicz and Robert Reed, director of programming, contributed to this article.